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SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF AWARD THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION(BBA) By RAHUL SHARMA Enrollment No. 0DL/ Under the Guidance of Mr. Dharmendra Singh Through SOFTDOT HITECH EDUCATION AND TRAINING INSTITUTE Pitampura, New Delhi-34 Study Center Code-1006 To Directorate of Open and Distance Learning Jamia Hamdard University, New Delhi-110062
I here by declare that the project report entitled on
Submitted in partial fulfillment Of the requirement to award the degree of BACHLOR IN BUSINESS ADMINISTRATION To Jamia Hamdard university, this is my original work and not submitted for the award of any other degree, diploma in fellowship, of any other similar tital of prizes
RAHUL SHARMA ENROLLMENT NO.-ODL/
CERTIFICATION BY ORIGINALITY
This is to certify that the project “___” is an original work of RAHUL SHARMA as a sudent of BBA ENROLMENT NO.-ODL is being submitted in partitial fulfillment for the award of the degree of Bachelors in Business Administration from Jamia Hamdard University through our recognized center- Softdot Hi-Tech Education & Training Institute (1006), Pitampura, New Delhi-34 RAHUL SHARMA as a sudent of BBA Enrollment no. ENROLLMENT NO.-ODL/has worked out under the guidance of Ms. Vaishali Sharma and declares that no part of this project has been submitted for the award of any degree, diploma, fellowship or any other similar title of price earlier to this university or to any other university/institute for the fulfillment of the requirement of a coerce of study.
DR. DHARMENDRA SINGH (COORDINATOR) CERTIFICATION BY EXAMINERS
Vaishali Sharma CONTENTS . G. has decided the title “CREDIT NRISK MANAJMENT IN INDIAN BANKS” as an approved and acceptable project in the standard quality to the set norms of jamia Hamdard University and by the institute as a Bachelor of Business Administration (BBA) to the student MANISH KUMAR DAHIYA Enrollment no.ENROLLMENT NO.-ODL/07/403/2659 Acadmic council of Softdot Hi-Tech Education & Training Institute.S. Kalsi Examiner: Mr. Certify By: Mr. ENROLLMENT NO.ODL/07/403/2659 according to the norms of the university standards academically.The project report is submitted for the final year of Bachelor of Business Administration in the stream of management (BBA) by a student of Jamia Hamdard University .
PARTICULARS EXECUTIVE SUMMARY INTRODUCTION TYPES OF RISKS IN A BANK RISK MANAGEMENT •1 Approaches •2 Process BASEL COMMITTEE CREDIT RISK •1 Credit Risk Management •2 Factors on which credit risk depends •3 Building blocks on Credit Risk •4 Principles for managing credit risk •5 Approaches to Credit Risk Management PUNJAB NATIONAL BANK •1 Profile •2 Credit Risk Management in PNB •3 Financial Position •4 Asset Quality •5 Capital & Financial Ratios ICICI BANK •1 Profile •2 Risk Management •3 Credit Risk Management •4 Capital Adequacy •5 Non-Performing Assets CANARA BANK •1 Profile •2 Risk Management •3 Capital Adequacy •4 Asset Quality ALLAHABAD BANK •1 Profile •2 Risk Management •3 Financial Position •4 Asset Quality & Capital Adequacy CONCLUSION BIBLIOGRAPHY PAGE NO. 7 10 11 13 14 21 23 27 27 29 39 44 47 48 48 49 50 54 56 57 57 59 60 60 62 62 63 64 65 66 69 7. 8. 11. EXECUTIVE SUMMARY . 6. 1 2 3 5 5.S. 2. 10. 12. 4. 9.NO . 1. 3.
. Canara Bank and Allahabad Bank. annual reports. To compare the credit position of these banks. To determine various tools and methods used by these Banks for managing the credit risk faced by them. OBJECTIVES OF THIS PROJECT REPORT: 1 2 3 4 To determine credit risk faced by different Banks in India. ICICI Bank. The research work is done on the basis of secondary data available on the websites of the banks. books etc.This project is concerned with determining the credit risk faced by banks under consideration and tools used by these banks for managing the credit risk and thereafter comparing these banks on the basis of techniques used by them for credit risk management. Banks considered for research purpose are: Punjab National Bank. To determine whether or not there is any improvement in banks credit position due to the use of such tools and methods.
textbooks.) will be applied on the collected data to extract the findings from it. personal interviews of some Bank Officials will also be conducted for extracting the essential information which not available through secondary sources. measurement. Risk means deviation from expectation and Risk Management involves identification. “consultative documents” from the publication of Banks etc.STRUCTURE OF THE PROJECT “RISK MANAGEMENT IN INDIAN BANKS” OBJECTIVES OF THE PROJECT: 5 6 7 To determine various types of risks faced by different Banks in India. To compare public sector banks and private sector banks according to the intensity of risks faced by them and tools used by them to manage those risks. However. ICICI Bank. newspapers. To determine various tools and methods used by these Banks for managing the risks faced by them. as it would be mainly based on the secondary data available from the various secondary sources like websites. HDFC Bank. This project is concerned with determining the risk faced by the banks under consideration and thereafter determining the risk management tools used by these banks. correlation etc. Banks considered for research are Standard Chartered Bank. IDBI Bank. Allahabad Bank & Canara Bank. Thereafter different Statistical Tools (like standard deviation. . magazines. An Exploratory Research will be conducted. monitoring and controlling risk.
The enhanced role of the banking sector in the Indian economy. the greater the risk. The greater the variability or dispersion in the possible outcomes. profit or return may not materialize. past experience. even though the exact values it take are not known. the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. BIBLIOGRAPHY . It can be defined as the chance that the expected or prospective advantage. gain. and the laws of chance. The measure of risk is Standard Deviation. Risk is a situation wherein objective probability distribution of the values a variable can take is known. Risk means deviation from expectation. Operating in this demanding environment has exposed banks to various challenges and risks. or the broader the range of possible outcomes. that the actual outcome of investment may be less than the expected outcome.INTRODUCTION Banking is an art & science of measuring & managing risks in lending and investment activities for commensurate profits based on the risk perceptions. The objective probability is one which is supported by rigorous theory. The face of banking in India is changing rapidly.
By: L. Banks considered for research purpose are: Punjab National Bank.pnbindia. To determine various tools and methods used by these Banks for managing the credit risk faced by them.com www. OBJECTIVES OF THIS PROJECT REPORT: • • • • To determine credit risk faced by different Banks in India. Canara Bank and Allahabad Bank.icicibank.M.com www.allahabadbank. By: M.com Online Newspaper: Hindu Business Line BOOKS: 1 Financial Institutions and Markets. To compare the credit position of these banks.com www. ICICI Bank.canarabank.Y. Khan EXECUTIVE SUMMARY This project is concerned with determining the credit risk faced by banks under consideration and tools used by these banks for managing the credit risk and thereafter comparing these banks on the basis of techniques used by them for credit risk management.WEBSITES: 1 2 3 4 5 6 www.com www.google. The research work is done on the basis of secondary data available on the . To determine whether or not there is any improvement in banks credit position due to the use of such tools and methods. Bhole Indian Financial System.
annual reports. .websites of the banks. books etc.
past experience. Risk is a situation wherein objective probability distribution of the values a variable can take is known. The face of banking in India is changing rapidly. that the actual outcome of investment may be less than the expected outcome. the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. The measure of risk is Standard Deviation. gain. Risk means deviation from expectation. and the laws of chance. the greater the risk. The objective probability is one which is supported by rigorous theory. . It can be defined as the chance that the expected or prospective advantage. or the broader the range of possible outcomes. profit or return may not materialize. even though the exact values it take are not known. Operating in this demanding environment has exposed banks to various challenges and risks. The greater the variability or dispersion in the possible outcomes.INTRODUCTION Banking is an art & science of measuring & managing risks in lending and investment activities for commensurate profits based on the risk perceptions. The enhanced role of the banking sector in the Indian economy.
interest rate conditions and currencies). These include: • Credit risk . • • • • • • • • . it arises from the failure on the part of the borrower or debtor to pay the specified amount of interest and/or repay the principal. If banks had perfectly matched assets and liabilities (i. or only being able to do so by recourse to emergency borrowing. Mismatching is an essential feature of banking business. for example. or that the counterparty will deteriorate in its credit standing i. Liquidity risk covers all risks that are associated with a bank finding itself unable to meet its commitments on time. Many of these risks are interrelated. exchange rates or securities prices. then the only risk faced by a bank would be credit risk. both at the time specified in the debt contract or covenant or indenture. then interest rate risk arises. Interest rate risk is the variability in return on security due to changes in the level of market interest rates. This course focuses on how the risk posed by changes in interest rates may adversely affect a bank’s net income and capital position. This sort of matching.e. identical maturities. Broadly refers to the risk that a bank’s earnings and capital might be adversely affected by changes in interest rates. and in any event would severely limit the banks’ profit opportunities. or it is the loss of principal of a fixed-return security due to an increase in the general level of interest rates i. As soon as maturities on assets exceed those of liabilities then liquidity risk arises. would be virtually impossible. however. through reduced interest margins on outstanding loans or reduction in the capital values of marketable assets. Many banking risks arise from the common cause of mismatching.e. it faces a wide variety of internal and external risks. it relates to risk of loss incurred due to changes in market rates.e.TYPES OF RISKS IN A BANK From the day a bank is granted its charter up until its final day of operation. When interest rate terms on items on either side of the balance sheet differ. Market risk relates to risk of loss associated with adverse deviations in the value of the trading portfolio. Sovereign risk appears if the international nature of each side of the balance sheet is not country-matched.Credit risk is also known as Default risk.financial transaction (the ‘borrower’) will fail to comply with its obligations to service debt. It is the risk that a counterparty to a .
Operational risk .” customer and employee fraud and undetected software errors.• Exchange Rate or Currency Risk – it refers to cash-flow variability experienced by economic units engaged in international transactions or international exchange. on account of uncertain or unexpected changes in exchange rates. • • • • • . Reputational risk .The risk of loss or harm from unenforceable contracts.The risk of loss or harm to a bank’s public image from negative publicity. Country risk is associated with the risks of incurring financial losses resulting from the inability and/or unwillingness of borrowers within a country to meet their obligations. Legal risk . lawsuits or adverse judgments. Solvency risk relates to the risk of having insufficient capital to cover losses generated by all types of risks.The risk of loss or harm from unanticipated internal or external events that occur in the course of conducting business such as equipment breakdowns. “acts of God.
d) The expected payoffs compensate for the risks taken e) Risk taking decisions are explicit and clear. Rather it should accept those risks that are uniquely part of the array of bank’s services. interest rate. f) Sufficient capital as a buffer is available to take risk The acceptance and management of financial risk is inherent to the business of banking and banks’ roles as financial intermediaries. viz. . b) The organization’s Risk exposure is within the limits established by Board of Directors. In every financial institution..RISK MANAGEMENT The banking industry has long viewed the problem of risk management as the need to control four of the above risks which make up most. ascertaining institutions risk appetite. of their risk exposure. rather the goal of risk management is to optimize riskreward trade -off. credit. Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. a) Strategic level: It encompasses risk management functions performed by senior management and BOD. It involves identification. For instance definition of risks. risk management activities broadly take place simultaneously at following different hierarchy levels: . formulating strategy and policies for managing risks and establish adequate systems and controls to ensure that overall risk remain within acceptable level and the reward compensate for the risk taken. Notwithstanding the fact that banks are in the business of taking risk. monitoring and controlling risks to ensure that a) The individuals who take or manage risks clearly understand it. they view them as less central to their concerns. it should be recognized that an institution need not engage in business in a manner that unnecessarily imposes risk upon it: nor it should absorb risk that can be transferred to other participants. measurement. c) Risk taking Decisions are in line with the business strategy and objectives set by BOD. Risk management as commonly perceived does not mean minimizing risk. While they recognize counterparty and legal risks. foreign exchange and liquidity risk. if not all.
Generally the risk management activities performed by middle management or units devoted to risk reviews fall into this category.b) Macro Level: It encompasses risk management within a business area or across business lines. This is the risk management activities performed by individuals who take risk on organization’s behalf such as front office and loan origination functions. define procedures to manage these exposures. . RISK MANAGEMENT APPROACHES: • • • • • • AVOIDANCE TRANSFER SHARING LOSS CONTROL SEPARATION COMBINATION RISK MANAGEMENT PROCESS: • IDENTIFICATION – The first step in risk management process is to identify the risk. The management of the banking firm relies on a sequence of steps to implement a risk management system. Traditional Risk Management Systems Commercial banks are in the risk business. These can be seen as containing the following four parts: • • • • Standards and reports Position limits or rules Investment guidelines or strategies Incentive contracts and compensation In general. In the process of providing financial services. and encourage decision makers to manage risk in a manner that is consistent with the firm's goals and objectives. The risk management in those areas is confined to following operational procedures and guidelines set by management. these tools are established to measure exposure. limit individual positions to acceptable levels. c) Micro Level: It involves ‘On-the-line’ risk management where risks are actually created. they assume various kinds of financial risks. So we need to determine an approach to examine large-scale risk management systems.
Basel II To set right these aspects. Different risk weights were specified by the committee for different categories of exposure. the Basel Committee came out with a set of recommendations aimed at introducing minimum levels of capital for internationally active banks. Pillar 1 Basel II norms provide banks with guidelines to measure the various types of risks they face . while the corporate loans had a risk-weight of 100 per cent. the Basel II norms are more risk-sensitive and they rely heavily on data analysis for risk measurement and management. • • • BASEL COMMITTEE Basel 1 In July 1988. the Basel Committee came up with a new set of guidelines in June 2004. These norms required the banks to maintain capital of at least 8 per cent of their risk-weighted loan exposures. For instance. Also. Then using the engineering strategies to transform the exposures to the desired form. market and operational risks and the capital required to cover these risks. MONITERING & REVIEW – Then the risk levels are monitered and reviewed and they are restored to the pre-determined standards. POLICY FORMULATION – then we decide the alternative tools and find the best alternative and various policies are formulated. They have given three pillars which act as guideline for implementation of Basel II. government bonds carried risk-weight of 0 per cent. popularly known as the Basel II norms. . the quantification of the level of exposures.credit.• QUANTIFICATION – After identifying the risk we have to quantify it using techniques like Standard Deviation i.e. These new norms are far more complex and comprehensive compared to the Basel I norms.
Market discipline has two important components: Market signalling in form of change in bank's share prices or change in bank's borrowing rates Responsiveness of the bank or the supervisor to market signals. Higher Risk Sensitivity . What they Mean for banks? Basel II norms are expected to have far-reaching consequences on the health of financial sectors worldwide because of the increased emphasis on banks' riskmanagement systems.Pillar II (Supervisory Reviews) ensures that not only do the banks have adequate capital to cover their risks. rating agencies. As a part of the supervisory process. Pillar III (Market Discipline) This market discipline is brought through greater transparency by asking banks to make adequate disclosures. The beneficiary will be the customer with high credit-worthiness and ratings as they will be able to get cheaper loans. Capital cannot be regarded as a substitute for inadequate risk management practices. This pillar requires that if the banks use asset securitisation and credit derivatives and wish to minimise their capital charge they need to comply with various standards and controls. depositors and investors. The potential audiences of these disclosures are supervisors. Active Risk Management The new norms bring to fore not only the issues of bank-wide risk measurement but also of active risk management. bank's customers. supervisory review process and market discipline. This will help in better pricing of the loans in alignment with their actual risks. the supervisors need to ensure that the regulations are adhered to and the internal measurement systems are standardised and validated. but also that they employ better risk management practices so as to minimise the risks.
But the population of rated corporate is small in India and most of them would have to be assigned a risk weight of 100 per cent. corporate profits and ratings tend to decline. The opposite is expected during economic booms. Lower Risk Weight Available Only for a Few Corporate With better risk measurement practices in place the capital allocation for loans to quality borrowers are going to decrease. This can lead to banks pulling the plugs on lending to corporates with falling credit ratings. During economic downturns. The cover required for bad loans will increase exponentially with deteriorating credit quality. when corporate credit worthiness improves and banks will be more than willing to lend to corporates. .Higher risk sensitivity of the norms provides no incentive to lend to borrowers with declining credit quality. therefore. which can lead to an increase in capital requirement. Banks can use this capital for other purposes to increase profits. at a time when these companies will be in desperate need of credit. be available only for loans to a few corporates. The benefit of lower risk weight of 20 per cent and 50 per cent would.
which can also cause problems for the bank. Credit risk. that funds will not be forthcoming from the customer upon crystallization of the liability under the contract. therefore. in some cases interest rate risk also comes under the credit risk. that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases. in the case of cross-border exposure. in the case of guarantees or letters of credit. Default risk relates to the possibility that loans will not be paid or that investments will deteriorate in quality or go into default with consequent loss to the bank. it also includes the risk of payments being delayed. in the case of treasury products. . arises from the banks' dealings with or lending to a corporate. that settlement will not be effected.CREDIT RISK Credit risk is the most obvious risk in banking. that the availability and free transfer of currency is restricted or ceases. The most important credit risk is the default risk. another bank. Credit risk arises from the potential that an obligor is either unwilling to perform on an obligation or its ability to perform such obligation is impaired resulting in economic loss to the bank. Credit risk is not concerned to the risk that borrowers are unable to pay. a decline in its share price. that funds will not be repaid. and possibly the most important in terms of potential losses. Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk may take various forms. financial institution or a country. such as: • • • • • in the case of direct lending. Capital markets react to a deterioration in a company’s credit standing through higher interest rates on its debt issues. and/or a downgrading of the assessment of its debt quality. individual. in the case of securities trading businesses. The default of a small number of key customers could generate very large losses and in an extreme case could lead to a bank becoming insolvent. However.
good knowledge of the borrower’s affairs and accurate monitoring and collection procedures. and a bank’s delegation rules specify responsibility for credit decisions. The same source that endangers credit risk for the institution may also expose it to other risk. . appropriate diversification. In addition to direct accounting loss. trading. In general. however. bankers must exercise discretion in maintaining a sensible distribution of liquidity in assets. Limitation refers to the way that banks set credit limits at various levels. For most banks. Credit risk can be further sub-categorized on the basis of reasons of default.In a bank’s portfolio. financial institutions or a sovereign. HIGHER THE EXPECTED REWARD” In general. For instance a bad portfolio may attract liquidity problem. This encompasses opportunity costs. For instance the default could be due to country in which there is exposure or problems in settlement of a transaction. Limit systems clearly establish maximum amounts that can be lent to specific individuals or groups. Credit risk emanates from a bank’s dealing with individuals. credit risk management for loans involves three main principles: • Selection • Limitation • Diversification. loans are the largest and most obvious source of credit risk. Credit risk not necessarily occurs in isolation. and also conduct a proper evaluation of the default risks associated with borrowers. protection against credit risks involves maintaining high credit standards. The processing of credit applications is conducted by credit officers or credit committees. corporate. selection means banks have to choose carefully those to whom they will lend money. transaction costs and expenses associated with a non-performing asset over and above the accounting loss. settlement and other financial transactions. losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending. As a result of these risks. Alternatively losses may result from reduction in portfolio value due to actual or perceived deterioration in credit quality. credit risk should be viewed in the context of economic exposures. First of all. CREDIT RISK MANAGEMENT PHILOSOPHY BEHIND CREDIT RISK MANAGEMENT IS: “HIGHER THE RISK. credit risk could stem from activities both on and off balance sheet.
the business risks to its commercial borrowers. in order to avoid excessive concentration of credit risk problems. manage proactively. it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes. whose credit risk is negligible. The more diversified a banking group is. dynamic world scenario experiencing the pressures of globalisation. since there are both quantity and quality dimensions to consider. consolidation and disintermediation. . have an advantage in this respect. Credit management has to be diversified. such as cash and government securities. Banks also have to observe maximum risk assets to total assets. Large banks. therefore. For example. and optimise their credit risk at an individual level or at an entity level or at the level of a country. Banks must spread their business over different types of borrower. and the commercial and the reputational risks concomitant with a failure to comply with the increasingly stringent legislation and regulations surrounding financial services business in many territories. These include the routine operational risks applicable to any commercial concern. assess. Credit risk management enables banks to identify. Given the fast changing. The long-standing existence of the above procedures within banks is insufficient to address all credit risk problems. the more intricate systems it would need. The size of the commitment is not sufficient to measure the risk. the amount of a potential loss is uncertain since outstanding balances at the time of default are not known in advance. Low loan loss banks stage a quicker share price recovery than their peers. Comprehensive risk identification and assessment are therefore very essential to establishing the health of any counterparty. to protect itself from a wide variety of risks. The quality of the credit risk management function will be the key driver of the changes to the level of shareholder return.Loans are also classified by size and limitations are put on the proportion of large loans to total lending. liberalization. and in a credit downturn. different economic sectors and geographical regions. the economic and political risks associated with the countries in which it operates. and should hold a minimum proportion of assets. the market rewards the banks with the best credit performance with a moderate price decline relative to their peers.
such as credit derivatives or tranches of securitised assets. EXTERNAL FACTORS The external factors are: • the state of the economy • swings in commodity prices and equity prices • foreign exchange rates and • interest rates. Such risks may extend beyond the conventional credit products such as loans and letters of credit and appear in more complicated.FACTORS ON WHICH CREDIT RISK DEPENDS The credit risk depends on both internal and external factors. INTERNAL FACTORS The internal factors are: deficiencies in loan policies and administration of loan portfolio which would cover weaknesses in the area of prudential credit concentration limits. • appraisal of borrowers' financial position • . less conventional forms. excessive dependence on collaterals and inadequate risk pricing. etc. • absence of loan review mechanism and post sanction surveillance. • . etc.
2 The strategy would therefore. Operations/Systems MIS requirements of the senior and middle management. Strategy and Policy This covers issues such as the definition of the credit appetite. prudential requirements. market. the corporate goals and credit culture are closely linked. This strategy should spell out clearly the organisation's credit appetite and the acceptable level of risk . documentation.3 The policy document should cover issues such as organizational responsibilities. 1. legal issues and management of problem loans. It has been empirically proved . product guidelines. should also provide a vital link to the other functions of the bank. Loan policies apart from ensuring consistency in credit practices. 3. and the development of tools and techniques will come under this domain. the cost of capital in granting credit and the cost of bad debts. 1. and an effective credit risk management framework requires the following distinct building blocks: 1.BUILDING BLOCKS ON CREDIT RISK In any bank. risk assessment and review. risk measurement and aggregation techniques.1 It is essential that each bank develops its own credit risk strategy or enunciates a plan that defines the objectives for the credit-granting function. include a statement of the bank's willingness to grant loans based on the type of economic activity.reward trade-off at both the macro and the micro levels. Strategy and Policy 1. the development of credit guidelines and the identification and the assessment of the credit risk. This would necessarily translate into the identification of target markets and business sectors. geographical location. Organisation This would entail the establishment of competencies and clear accountabilities for managing the credit risk. reporting requirements. 1. currency. 2. risk grading. maturity and anticipated profitability. preferred levels of diversification and concentration.
This strategy should be viable in the long run and through various credit cycles. Sound procedures to ensure that all risks associated with requested credit facilities are promptly and fully evaluated by the relevant lending and credit officers. 3. bullion etc. 1. Systems to assign a risk rating to each customer/borrower to whom credit facilities have been sanctioned. 4. 6. 2. a bank will be able to set its target returns to its shareholders and this will determine the level of capital available to the various business lines.that organisations with sound and well-articulated loan policies have been able to contain the loan losses arising from poor loan structuring and perfunctory risk assessments. Dedicated policies and procedures to control exposures to designated higher risk sectors such as capital markets. 1. and will need to take into account the cyclical aspects of any economy and the resulting shifts in the composition and quality of the overall credit portfolio. defence equipment. aviation. A mechanism to price facilities depending on the risk grading of the customer. shipping. property development. http://www. a bank should have the following in place: 1.6 Keeping in view the foregoing. 8.4 The credit risk strategy should provide continuity in approach. credit approval authority.coolavenues.php3 1. highly leveraged transactions. and to attribute accurately the associated risk weightings to the facilities. Procedures and systems which allow for monitoring financial performance of customers and for controlling outstandings within limits. risk acceptance criteria.5 An organisation's risk appetite depends on the level of capital and the quality of loan book and the magnitude of other risks embedded in the balance sheet. 7. 5. A process to conduct regular analysis of the portfolio and to ensure on-going control of risk concentrations.com/know/fin/svs_credit_3. credit origination and maintenance procedures and guidelines for portfolio management and remedial management. Systems to manage problem loans to ensure appropriate restructuring schemes. Based on its capital structure. Credit Policies and Procedures The credit policies and procedures should necessarily have the following elements: • Banks should have written credit policies that define target markets. Efficient and effective credit approval process operating within the approval limits authorized by the boards. . A conservative policy for the provisioning of non-performing advances should be followed.
The level of authority required to approve credit will increase as amounts and transaction risks increase and as risk ratings worsen. it is the responsibility of banks to accurately. but are not limited to. Banks should ensure that there are consistent standards for the origination. . the classification of problem exposures. periodic plant visits. and at least quarterly management reviews of troubled exposures/weak credits. periodic credit calls that are documented. completely and in a timely fashion. obligor limits and concentration limits by industry or geography. Banks should have a system of checks and balances in place around the extension of credit which are: o o o • • An independent credit risk management function Multiple credit approvers An independent audit and risk review function • The Credit Approving Authority to extend or approve credit will be granted to individual credit officers based upon a consistent set of standards of experience. documentation and maintenance for extensions of credit. judgment and ability. Credit risk limits include. Banks should maintain a diversified portfolio of risk assets in line with the capital desired to support such a portfolio. Business managers in banks will be accountable for managing risk and in conjunction with credit risk management framework for establishing and maintaining appropriate risk limits and risk management procedures for their businesses. In order to ensure transparency of risks taken. and remedial action.• Banks should establish proactive credit risk management practices like annual / half yearly industry studies and individual obligor reviews. Organizational Structure 2. report the comprehensive set of credit risk data into the independent risk system. In some organisations. Every obligor and facility must be assigned a risk rating. This will ensure that decisions are made with sufficient emphasis on asset quality and will deploy specialised skills effectively.1 A common feature of most successful banks is to establish an independent group responsible for credit risk management. Banks should have a consistent approach toward early problem recognition. • • • • • • • 2.
credit cards. Credit Risk Management Department (CRMD) and the Chief Economist. In addition. should provide input to the Asset . constitute a high level Credit Policy Committee also called Credit Risk Management Committee or Credit Control Committee. 2. independent of the Credit Administration Department. Treasury.4 Keeping in view the foregoing. identify problems and correct deficiencies. Inputs should be provided for the strategic and annual operating plans. rating standards and benchmarks. regulatory/legal compliance. etc. securities processing. The CRMD should also be made accountable for protecting the quality of the entire loan portfolio. this team should review credit related processes and operating procedures periodically. inter alia. This document should be made available to both the internal and external auditors for their scrutiny and comments. each bank may also set up Credit Risk Management Department (CRMD). each bank may.Liability Management Committee of the bank. 2. The responsibilities of this team are the formulation of credit policies. The CRMD should also lay down risk assessment systems. formulate clear policies on standards for presentation of credit proposals. All lending officers should clearly understand the bank's approach to granting credit and should be held accountable for complying with the policies and procedures. This team should also have an overview of the loan portfolio trends and concentration risks across the bank and for individual lines of businesses. risk monitoring and evaluation. Should the Board decide not to accept any recommendation of the credit risk management team and then systems should be in place to have the rationale for such an action to be properly documented. Concurrently. manage and control credit risk on a bank wide basis. asset concentrations. financial covenants. payment and settlement systems. loan review mechanism. monitor quality of loan portfolio.2 It is imperative that the independence of the credit risk management team is preserved. portfolio management.3 The credit risk strategy and policies should be effectively communicated throughout the organisation. and it is the responsibility of the Board to ensure that this is not allowed to be compromised at any time. to deal with issues relating to credit policy and procedures and to analyse. standards for loan collateral. etc. . The CRMD should enforce and monitor compliance of the risk parameters and prudential limits set by the CPC.the credit risk management team is responsible for the management of problem accounts. and conduct industry and sectoral studies. trade finance. Large banks may consider separate set up for loan review/audit. pricing of loans. The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the resilience of the loan portfolio. procedures and controls extending to all of its credit risks arising from corporate banking. treasury. and for credit operations as well. personal banking. prudential limits on large credit exposures. depending on the size of the organization or loan book. provisioning. The Committee should be headed by the Chairman/CEO/ED. and should comprise heads of Credit Department. risk concentrations. delegation of credit approving powers. etc. develop MIS and undertake loan review/audit. The Committee should. 2.
com/know/fin/svs_credit_5.com/know/fin/svs_credit_6.TYPICAL ORGANISATIONAL STRUCTUREhttp://www.php3 http://www.coolavenues.php3 .coolavenues.
Transaction management phase: cover risk assessment. 3.com/know/fin/svs_credit_4.1 Banks should have in place an appropriate credit administration. The rating system should be consistent with the nature. Each bank should have a clear. measurement and monitoring process. judgement and a commitment to technical development.2 Successful credit management requires experience. clear and consistent assessment systems. 2. 3. Decision support tools such as credit scoring and risk grading. pricing. Relationship management phase i. obtaining internal approvals. Portfolio techniques such as portfolio correlation analysis. responsiveness and accurate measurement of the risk. which will enable them to manage and measure the credit risk inherent in all on. The credit process typically involves the following phases: 1. 3. documentation. The key is to identify the tools that are appropriate to the bank. Banks should price their loans according to the risk profile of the borrower and the risks associated with the loans. These are: • • • Traditional techniques such as financial analysis. loan administration and routine monitoring and measurement. 3. The banks should have systems in place for reporting and evaluating the quality of the credit decisions taken by the various officers. size and complexity of the bank's activities. Portfolio management phase: entail the monitoring of the portfolio at a macro level and the management of problem loans. There is a range of tools available to support the decision making process. Banks should develop and utilize internal risk rating systems in managing credit risk.4 Commitment to new systems and IT will also determine the quality of the analysis being conducted. . Operations / Systems 3.5 Banks must have a MIS. Authorities should be delegated to executives depending on their skill and experience levels. well-documented scheme of delegation of limits. a process which ensures that renewal requests are analyzed as carefully and stringently as new loans and constant reinforcement of the credit culture by the top management team.php33. The MIS should provide adequate information on the composition of the credit portfolio. structuring of the facilities. business development.3 The credit approval process should aim at efficiency. 3.http://www. This will be achieved through a comprehensive analysis of the borrower's ability to repay.coolavenues.e. including identification of any concentration of risk.and off-balance sheet activities.
The measurement of credit risk is of vital importance in credit risk management. Business Risk • • • Industry Characteristics Competitive Position (e. A number of qualitative and quantitative techniques to measure risk inherent in credit portfolio are evolving. marketing/technological edge) Management 2.g. the rating framework may. banks should establish a credit risk rating framework across all type of credit activities. Among other things.MEASURING CREDIT RISK. To start with. incorporate: 1. Financial Risk • • • • Financial condition Profitability Capital Structure Present and future Cash flows .
the adequacy of provisions and reserves. 2. measure. (ii) operating under a sound credit-granting process. bonds. The sound practices set out in this document specifically address the following areas: (i) establishing an appropriate credit risk environment. including acceptances. however. and in the extension of commitments and guarantees. The goal of credit risk management is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. banks and their supervisors should be able to draw useful lessons from past experiences. a comprehensive credit risk management program will address these four areas. measurement and monitoring process. 3. trade financing. including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function. they should be applied to all activities where credit risk is present. 6. The Basel Committee is issuing this document in order to encourage banking supervisors globally to promote sound practices for managing credit risk. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans. While financial institutions have faced difficulties over the years for a multitude of reasons. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. including in the banking book and in the trading book. 4. financial futures. Banks should now have a keen awareness of the need to identify. the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties. and the disclosure of credit risk. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality. interbank transactions. (iii) maintaining an appropriate credit administration. Banks should also consider the relationships between credit risk and other risks.PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK 1. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation. swaps. For most banks. and both on and off the balance sheet. monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. and (iv) ensuring adequate controls over credit risk. This experience is common in both G-10 and non-G10 countries. While the exact approach chosen by individual supervisors will depend on a host of factors. Although the principles contained in this paper are most clearly applicable to the business of lending. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. other sources of credit risk exist throughout the activities of a bank. poor portfolio risk management. foreign exchange transactions. options. Since exposure to credit risk continues to be the leading source of problems in banks worldwide. Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities. 5. and the settlement of transactions. all members of the Basel Committee agree that . equities. all of which have been addressed in other recent Basel Committee documents. loans are the largest and most obvious source of credit risk. or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties.
If one side of a transaction is settled but the other fails. supervisors need to determine that the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk-return discipline in their credit risk management processes. and the role of intermediaries and clearing houses. payment/settlement finality.the principles set out in this paper should be used in evaluating a bank's credit risk management system. A further particular instance of credit risk relates to the process of settling financial transactions. THE STANDARDISED APPROACH TO CREDIT RISK . For smaller or less sophisticated banks. then the other party may incur a loss relating to missed investment opportunities. Standardised Approach 2. Settlement risk (i. that is. 7. The level of risk is determined by the particular arrangements for settlement. The Committee stipulates in Sections II through VI of the paper. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity. principles for banking supervisory authorities to apply in assessing bank's credit risk management systems. Factors in such arrangements that have a bearing on credit risk include: the timing of the exchange of value. 1. market. a loss may be incurred that is equal to the principal amount of the transaction. the appendix provides an overview of credit problems commonly seen by supervisors. Internal Rating Based (IRB) Approach 1. Even if one party is simply late in settling. operational and reputational risk as well as credit risk. Supervisory expectations for the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the bank's activities. APPROACHES TO CREDIT RISK MANAGEMENT The Basel Committee has proposed two approaches for estimating regulatory capital.e. 8. In addition.
The Risk Weights in the Standardised Approach: Along the lines of the proposals in the consultative paper to the new capital adequacy framework issued in June 1999. Under the Standardised Approach. This should improve the incentives for banks to enhance the risk measurement and management capabilities and should also reduce the incentives for regulatory capital arbitrage. preferential risk weights in the range of 0. • Third. Standardised approach to credit risk in Basel II: The minimum capital requirements for the corporate. even after accounting for operational risk. banks and sovereigns on average in the EMU. compared to the present Accord. on an average. although the use of different combinations of credit rating agencies leads to significant differences in minimum capital requirements. these differences never exceed 10% of banks’ regulatory capital for loans to corporates. • First. the standardised approach provides a small regulatory capital incentive for banks to use several credit rating agencies to risk-weight their exposures. the minimum capital requirements for the corporate. Objectives of the Standardised Approach The standardised approach is the simplest of the three broad approaches to credit risk. 100 and 150 percent would be assigned on the basis of external credit assessments. Accordingly. The other two approaches are based on banks internal rating systems The standardised approach aligns regulatory capital requirements more closely with the key elements of banking risk by introducing a wider differentiation of risk weights and a wider recognition of credit risk mitigation techniques. The incentive for banks to engage in regulatory arbitrage in the standardised approach to credit risk is limited. interbank and sovereign loan portfolios of a representative bank in each EMU country are evaluated by means of Monte-Carlo simulations depending on the credit rating agencies chosen by the bank to risk-weight its exposures.1 the risk weighted assets in the .Under the Standardised Approach. in minimum regulatory capital. Three main results emerge from the analysis. while avoiding excessive complexity. • Second. the committee desires neither to produce net increase nor a net decrease. interbank and sovereign loan portfolios of EMU banks will be higher in Basel II than in Basel I. the standardised approach should produce capital ratios more in line with the actual economic risks that banks are facing. 50. 20.
the risk weights will be determined by the category of the borrower: sovereign. 2. consistent ratings) developed quickly (volume!).standardized approach will continue to be calculated as the product of the amount of exposures and supervisory determined risk weights. INTERNAL RATING BASED(IRB) APPROACH Under the IRB Approach. or corporate. updated and replaced. Unlike in the current Accord. a reduction in the risk weighted assets of 2 to 3 percent (foundation IRB approach) and 90 percent of the capital requirement under the foundation approach for the advanced IRB approach to encourage banks to adopt IRB approach for providing capital. bank. . there will be no distinction on the sovereign risk weighting depending on whether or not the sovereign is a member of the Organisation for Economic Coordination. • Nice to have: rating models have to be easily taken into production. As in the current Accord. significant discrimination between risk segments) reliable (stable performance. that is.Minimum Capital to Risk-weighted Assets Ratio (CRAR) should be 9 %. without any IT or other bottleneck easily integrated in all relevant processes and applications (also in realtime or indirect channels) easily (re-)used in marketing and sales processes easily and safely managed. NOTE . monitored and back-tested combined with human judgment massively documented. consistently and safely analysed. the committee’s ultimate goals are to ensure that the overall level of regulatory capital is sufficient to address the underlying credit risks and also provide capital incentives relative to the standardized approach. • Need to have: rating models have to be predictive (accurate ratings.
ANALYSIS & FINDINGS .
Keeping in tune with changing times and to provide its customers more efficient and speedy service. The bank has been focussing on expanding its operations outside India and has identified some of the emerging economies which offer large business potential. has placed PNB at the 248th position. Considering the importance of small scale industries bank has established 31 specialised branches to finance exclusively such industries. Punjab National Bank offers a wide variety of banking services which include corporate and personal banking. .. Bank is a member of the SWIFT and over 150 branches of the bank are connected through its computer-based terminal at Mumbai. PNB also offers Internet Banking services in the country for Corporates as well as individuals. All the Branches of the Bank have been computerized. Shanghai: China and in London.the name you can BANK upon PROFILE With its presence virtually in all the important centres of the country. With its state-of-art dealing rooms and well-trained dealers. bank has Rupee Drawing Arrangements with 15 exchange companies in the Gulf and one in Singapore.largest amongst Nationalized Banks. industrial finance. the Bank has taken major initiative in the field of computerization.PUNJAB NATIONAL BANK PNB…. Internet Banking services are available through all Branches of the Bank networked under CBS. the bank features at 1308th position among Forbe’s Global 2000 list of global giants and fast growing companies. Strong correspondent banking relationship which Punjab National Bank maintains with over 200 leading international banks all over the world enhances its capabilities to handle transactions world-wide. Bank has opened a full fledged Branch in Kabul. agricultural finance. “The Banker”. Afghanistan. exporters. the leading magazine in London. At the same time. Among the clients of the Bank are Indian conglomerates. the bank has been conscious of its social responsibilities by financing agriculture and allied activities and small scale industries (SSI). Punjab National Bank is serving over 3. medium and small industrial units. financing of trade and international banking. While among top 1000 world banks. nonresident Indians and multinational companies. Besides. Besides. The large presence and vast resource base have helped the Bank to build strong links with trade and industry. Bank has set up representative offices at Almaty: Kazakhistan. Punjab National Bank with 112 year tradition of sound and prudent banking is one among 300 global companies and seven Indian companies which are expected to emerge as challengers to World’s leading blue chip companies. The Bank has also launched aggressively the concept of "Any Time. the bank offers efficient forex dealing operations in India.5 crore customers through 4563 Offices including 421 extension counters . Any Where Banking" through the introduction of Centralized Banking Solution (CBS) and over 2409 offices have already been brought under its ambit.
Another step taken by PNB in meeting the changing aspirations of its clientele is the launch of its Debit card. insurance and other bills anytime from anywhere from their desktop.Providing 24 hours. anywhere access to account. apart from the PNB's over 1094 ATMs and tie up arrangements with other Banks. 365 days banking right from the PC of the user. mobile. and statement of account. Internet Banking offers world class banking facilities like anytime. the card can be used to withdraw cash at more than 25000 ATMs. online information of deposits. PNB has recently introduced Online Payment Facility for railway reservation through IRCTC Payment Gateway Project and Online Utility Bill Payment Services which allows Internet Banking account holders to pay their telephone. Besides. complete details of transactions. where the 'Maestro' logo is displayed. which is also an ATM card. electricity. It enables the card holder to buy goods and services at over 99270 merchant establishments across the country. ANALYSIS & FINDINGS . loans overdraft account etc.
PNB…. The system enables the bank to evaluate and track risk on individual obligors on a continuing basis. To provide a standard definition and benchmarks under the credit risk rating system. CREDIT RISK RATING SYSTEM .the name you can BANK upon The credit risk rating system provides a common language and uniform framework across bank for assessing credit risk. bank has been continuously monitoring the ratings and their migration.. it enables banks to track and manage risk on portfolio basis also. In order to create and stabilize robust credit risk management system. seven rating grades for performing loans have been specified. And most importantly.
which makes the data collection and storage easier. The data is stored in a centralized server. Banks and Financial Institutions Rating Model 8. Large Corporate Borrowers ( Bank exposure more than Rs. . It incorporates all rating models on a single platform and enables on line rating of borrowers.20 Lacs) 5. Mid Corporate Borrowers ( Bank exposure from Rs. New Projects Rating Model 7. Thus fresh rating in the accounts is conducted annually.5 crore) 4. The average annual default rates in these rating grades is under 2 %. Small Borrowers – II ( Bank exposure from Rs. Facility Rating Model 11. NBFCs Rating Model 6. 1.15 crore) 3.PNB TRAC is an internally developed centralised web based software application for assessment of credit risk in a borrowal account. Out of the seven rating grades. Industry Exposure limits 12.2 lacs to less than Rs.20 lacs to less than Rs. Preventive Monitoring System is put in place to track the changes in the account based on the the adverse signals observed in the operations of account and select performance parameters. TOOLS FOR CREDIT RISK IN PNB Various Credit risk rating models are used to rate the borrower on a scale of seven rating grades. Segment wise Retail Rating To ensure the quality and consistency of credit risk ratings. vetting of the rating is also done.15 crore) 2. Half Yearly Review of Rating 10.I(Bank exposure from Rs. B and above are treated as Investment Grade. Small Borrowers -.5 crore to less than Rs. New Business Rating Model 9. The credit risk rating of a borrower becomes due for updation after the expiry of 12 months from the month of previous rating. It ranks accounts on a scale of 1-10.
Exposure is not taken in industries considered unfavorable. then such sanction is given only by the Board of the bank. Management or Conduct of Accounts and the steps they can take to improve their rating. However in case the Zonal head finds a bankable proposal. . Where the borrowers like to know about the rationale of their rating. Business/Industry. The pricing of the facility is linked with credit risk rating in case of rated accounts. No fresh exposure is taken in 'C'& 'D' rated accounts. Management Committee of the Board is empowered to consider proposals in respect of fresh exposure in such accounts. Better-rated accounts are priced at lower rate of interest as compared to low rated accounts. Interest rate is charged depending upon the quality of asset.CREDIT RISK MANAGEMENT THROUGH RATING SYSTEM The Bank has in place a multi-tier credit approving system. Adhoc/additional/enhancement facility in 'C'& 'D' rated accounts is to be sanctioned by authority not below the level of Zonal head and in exception circumstances. However. higher loaning powers have been vested with various level of officials for better rated borrowers. they are informed about their weak areas such as Financial. In order to enable the field functionaries to take expeditious decisions and also to attract quality accounts.
AVERAGE ANNUAL DEFAULT RATES UPTO 31.3.2005 PROBABILITY OF DEFAULT FOR RATED ACCOUNTS .
COMPARATIVE AVERAGE ANNUAL DEFAULT RATE .
PREVENTIVE MONITORING SYSTEM (PMS) Credit Monitoring/Post-sanction follow up is an important ingredient of sound Credit Management System and calls for monitoring of the health/conduct of borrowal accounts on regular intervals.PMS rank is calibrated on a scale of 1-10. SALIENT FEATURES OF PMS • • • • • Comprehensive performance etc. Diagnostic . It is an action oriented post sanction monitoring tool that tracks and evaluates the health of a borrowal account on regular basis. The aim is to minimise the loan losses by focusing on accounts showing “ Early Warning” signals of deterioration.Timely action / corrective measures can be taken in Early Warning Category Accounts.Unsatisfactory features or irregularities are accounted for one year. PMS rank is an input to credit risk rating. Continuous monitoring of health & conduct of account. It is also pivotal for improving the Asset (Credit Portfolio) Quality of the bank. .The reasons behind deterioration are analysed for taking remedial steps. business Objective . Captures negative signals in respect of 27 parameters. Memory . –Covers indicators of conduct of account. Preventive .Health of the account is reflected as a single numerical score.
It then follows a "Christmas Tree" approach drilling down to assessment of various minute factors. Infrastructure Companies. Non-Banking Financial Companies. The final rating or grading is based on the weighted average score of all assessed factors. user-interfaces as well as various reports for Management Information System. Once the credit risk assessment is done by the first level officer. Facility Risk Rating module (FRR) . RAM guides a user to assess the credit risk of various categories of borrowers such as Large Corporates. Banks. Capital Market Brokers. Traders. CREDIT RISK ASSESSMENT SOFTWARE MODEL(RAM) PNB also uses RAM for managing credit risk faced by it.Bank initiates necessary actions on accounts showing early warning signals through PMS or having ‘C’ or ‘D’ (high) risk-rating. Green-Field Projects. RAM is internal rating software designed to assist a Bank or financial institution address issues raised by the Internal Rating based approach of the New Basel Accord (Basel II). RAM is an easy to use Internal Rating software installed in the central server of an institution and accessible throughout the organization. RAM is also capable of incorporating any number of rating models through a Visual Basic based client interface. the assessment can either be approved or modified at various higher levels in the risk hierarchy. It is this rating experience. Banks. the default risk of such companies. which is encapsulated in RAM. Small and Medium Enterprises. "Business Risk" and "Management Risk". "Industry Risk". Audit trails capture all modifications/changes/comments at each level. RAM follows a pre-designated (customizable) workflow approach to credit risk assessment and begins with assessment of "Financial Risk". etc CRISIL by virtue of being the fourth largest rating agency in the world has over the years been very successful in rating companies belonging to various categories and has been able to predict with a high degree of probability. RAM is a highly parametric software which can be easily customized to the user environment right from Workflows. Powerful features like Financial Analysis Tool (FAT).
These features and other such. The database is ORACLE 9i. RAM is a web-based application. make RAM a complete Credit Risk Management Software which performs much more than just rating the obligor and enables the Risk Manager to analyze the credit risk take a 360 degree view of the account being rated. available on a Java 2 Enterprise Edition (J2EE) framework. which is platform independent.and an intelligent feature called 'Virtual Guide' which guides an analyst or officer to probe deeper into the account being rated. FINANCIAL POSITION GROWING SIZE OF PNB (Rs. In Crore) .
8 25. loss on transfer of Securities) 30.Largest network amongst nationalized banks with 4563 offices.8 33.5 47.06.06.3 7.8 8.4 6.9 47.07 3363 1985 1378 432 1810 877 641 236 933 30.2 NET PROFIT .07 2630 1348 1282 293 1575 697 479 218 878 Growth (%) 27. OPERATING PROFIT PARTICULARS Interest Income Interest Expenses Net Interest Income Non-Interest Income Net Total Income Operating Expenses a) Staff Expenses b) Other Operating Expenses OPERATING PROFIT (Excl.4 25.
2 % 138 86 26 364 14 626 201 425 . on Investments(Net of Dep.26 514 146 368 15. Held against securities transferred) c) Others PROFIT BEFORE TAX LESS: Provision for Taxes NET PROFIT 30.06. in Crore) PARTICULARS Operating Profit(excl. .06 878 Nil Growth (%) 6.(Rs.07 933 69 30.4 % 21. Held) LESS: Provisions for a) NPAs b) Dep.7 % NON INTEREST INCOME Excluding the loss incurred on Transfer of securities to HTM portfolio. loss on transfer of securities) LESS: Loss on transfer of securities(net of dep.06.
75 % in April’06 to 12.23% (Jun’07) from 8.CREDIT PORTFOLIO Yield on Advances increased to 10. PLR further increased to 13 %.2% in Jun’06.2% of Bank’s net credit at the end of Jun’07 compared to 16. During FY07.76% (Jun’06) • • • • Advances rose to Rs 95. .25% in Mar’07.2% in Jun’06.3%. The eight Large Corporate Branches (LCBs) account for around 18. C/D ratio increased to 67.640 cr at the end of june’07 showing a YOY growth of 23. During Q1 FY 08. bank’s PLR was increased from 10.1% as at Jun’07 compared to 66.
In Crore) • • • • 2/3 of our branches are in Rural/ Semi-urban area with predominance in the Indo-Gangetic plain where major economic activity is agriculture which gives us a natural advantage in disbursing agriculture credit. Catering to niche segments through 101 Specialised Branches. rural women & unemployed youth. .Focus Area – Agriculture & SME (Rs. Bank has a long tradition of lending to agriculture and it has given us reasonable returns. Towards empowering farmers bank has set up 8 ‘Farmers’ Training Centres’ which provide free training to farmers.
7% of Net credit as on 30th June 2007. As at 30th June’07 the outstanding under education loan increased by 40%. • Education loan is the area of thrust for the bank. .Retail Credit Retail credit constitutes 22.172 crore as on 30th Jun’06.035 crore as on 30th June’07 compared to Rs 18.7% to Rs 22. • Loan to traders increased by 47%. • Outstanding Retail credit increased by 21. • Gross NPA in retail advances was about 2% as at 30th Jun’07 42 Hub & Spoke models to cater the need of retail segment.Focus Area . • Housing loan showed an increase of 18%.
.ASSET QUALITY Improving Asset Quality is a Focus area of Bank.
06. .0 . Though in absolute terms Gross NPA has increased from 2006 to 2007 but in comparative terms it has been decreased.06. 3162 crores in June’06 to Rs.07 G O S N A A A %O G O S C E IT R S P S F R S RD 4 3 5 . in Crores 3162 GROSS NPA 30.98 % to 3. 3709 crores in June’07.8 3 .0 0 6 6 3 .7 3 .GROSS NPA 3800 3600 3400 3200 3000 2800 3709 Rs.9 Gross NPA of PNB has increased from Rs.9 3 5 .7 3 .81 %.9 3 . This shows that PNB has effective credit risk management system due to which it has been able to reduce the percentage of defaults as compared to its gross credit.0 0 6 7 3 1 . Gross NPA as a % of Gross credit has reduced from 3.0 .8 3 5 .8 G O SN AA R S P S A %O G O S F R S C E IT RD % 3 8 . However.06 30.
06.07 and also Net NPA as a % of Net Credit has increased from .06.6 0.06.6.8 0.6.07 NET NPA AS A % OF NET CREDIT 1.98 Net NPA of PNB has increased drastically from Rs.NET NPA 1000 900 800 700 600 500 400 300 200 100 0 926 Rs.4 0.06 30.2 0 30.06. 266 crores in 30.35 % in ‘06 to . .35 NET NPA AS A % OF NET CREDIT % 0. in CRORE NET NPA 266 30.06 30.07 0.06 to Rs.98 % in ’07 which shows that overall there is some flaw in credit risk management system of PNB which it should take care of.2 1 0. 926 in 30.
29 9. ICICI BANK .CAPITAL & FINANCIAL RATIOS Comfortable Capital Adequacy Ratio PARTICULARS CRAR (%) Tier I Tier II FINANCIAL RATIOS (%) AVG.38 MARCH’07 12.25 10.93 3.60 8.16 3.36 9.23 5.17 4.29 % in June ’06 to 12. RETURN ON ADVANCES AVG COST OF DEPOSITS JUNE ‘07 12.41 9.46 JUNE ‘06 12.69 2.76 4.29 8.53 The CRAR of PNB has increased from 12.41 % in june’07 which means that there is an increase in banks’ capital as compared to its risk weighted assets which is good for the bank.
687 ATMs in India and presence in 18 countries. Russia and Canada. Bangladesh. 3.08 billion for the nine months ended December 31. Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking. 2007. 30. South Africa. we are exposed to risks that are particular to our lending. branches in Unites States.00 billion (US$ 96 billion) at December 31. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). Sri Lanka. life and non-life insurance. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation. Singapore. ANALYSIS & FINDINGS RISK MANAGEMENT As a financial intermediary.767. Thailand. transaction banking and trading businesses and the environment within which we . Bahrain. China. The Bank currently has subsidiaries in the United Kingdom. 2007 and profit after tax of Rs. The Bank has a network of about 955 branches and 3. venture capital and asset management. Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates.PROFILE ICICI Bank is India's second-largest bank with total assets of Rs. Hong Kong.
Our goal in risk management is to ensure that we understand. The Audit Committee provides direction to and also monitors the quality of the internal audit function. and regulatory and compliance issues in relation thereto. measure and monitor the various risks that arise and that the organization adheres strictly to the policies and procedures. investment policies and strategy. Committees of the board of directors have been constituted to oversee the various risk management activities. • The Compliance Group reports to the Audit Committee of the board of directors and the Managing Director and CEO. liquidity. • The Internal Audit Group reports to the Audit Committee of the board of directors. which are established to address these risks. the Credit and Treasury Middle Office Groups and the Global Operations Group monitor operational adherence to regulations. Middle Office Groups and Global Operations Group report to a whole time Director. ICICI Bank is primarily exposed to credit risk.operate. The Risk Committee reviews risk management policies in relation to various risks including portfolio. with a mandate to identify. The Credit Committee reviews developments in key industrial sectors and our exposure to these sectors as well as to large borrower accounts. The Asset Liability Management Committee is responsible for managing the balance sheet and reviewing the asset-liability position to manage ICICI Bank's liquidity and market risk exposure The Compliance Group is responsible for the regulatory and anti-money laundering compliance of ICICI Bank. interest rate. liquidity risk. operational risk and legal risk. In addition. The Global Risk Management Group is further organized into: • the Global Credit Risk Management Group • the Global Market and Operational Risk Management Group. These groups are independent of the business units and coordinate with representatives of the business units to implement ICICI Bank's risk management methodologies. ICICI Bank has three centralized groups: • the Global Risk Management Group • the Compliance Group and • the Internal Audit Group . . assess and monitor all of ICICI Bank's principal risks in accordance with well-defined policies and procedures. market risk. • The Global Risk Management Group. policies and internal approvals.
It also draws upon reports from the Credit Information Bureau (India) Limited (CIBIL). Our credit officers evaluate credit proposals on the basis of the approved product policy and risk assessment criteria. We have standardized credit approval processes. We measure. The functions of this department include: Review of Credit Origination & Monitoring Credit rating of companies/structures Default risk & loan pricing Review of industry sectors Review of large exposures in industries/ corporate groups/ companies Ensure Monitoring and follow-up by building appropriate systems such as CAS . External agencies such as field investigation agencies and credit processing agencies are used to facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans to individual borrowers. We continuously refine our retail credit parameters based on portfolio analytics. all products. has been well internalised within the Bank. The rating serves as a key input in the approval as well as post-approval credit processes. The rating factors in quantitative. regulatory bodies and industry experts. The rating for every borrower is reviewed at least annually. In our retail credit operations. Risk-based pricing of loans has been introduced. monitor and manage credit risk for each borrower and also at the portfolio level. The industry analysts of the department monitor all major sectors and evolve a sectoral outlook. Industry knowledge is constantly updated through field visits and interactions with clients. the credit officer conducts a centralised check on the delinquencies database and review of the borrower’s profile.CREDIT RISK Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. Credit rating. We have developed internal credit rating methodologies for rating obligors. The department has done detailed studies on default patterns of loans and prediction of defaults in the Indian context. the most significant risk faced by ICICI Bank. qualitative issues and credit enhancement features specific to the transaction. Credit approval authority lies only with our credit officers who are distinct from the sales teams. which is an important input to the portfolio planning process. which include a wellestablished procedure of comprehensive credit appraisal and rating. Credit scoring models are used in the case of certain products like credit cards. is managed by the Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as well as in the portfolio context. CREDIT RISK MANAGEMENT BY ICICI BANK Credit risk. policies and authorisations are approved by the Board or a Board Committee or pursuant to authority delegated by the Board. Before disbursements are made. as a concept.
operating margins and earnings stability. and • the quality of management by analyzing their track record. After conducting an analysis of a specific borrower's risk. and provide real time information on credit risk. New Product Approval Policy. payment record and financial conservatism. Credit Risk Assessment Procedures for Corporate Loans In order to assess the credit risk associated with any financing proposal. including return on capital employed. the CRC & AD has implemented a sophisticated information system.Pricing.Methodology to measure portfolio risk . ICICI Bank has a scale of 10 ratings ranging from AAA to B. its past financial performance. its financial flexibility in terms of ability to raise capital and its cash flow adequacy. Industry risk is evaluated by considering: • certain industry characteristics. 1. an additional default rating of D and short-term . the CRC & AD has designed a web-based system to render information on various aspects of the credit portfolio of ICICI Bank. and • certain industry financials. the Global Credit Risk Management Group assigns a credit rating to the borrower. cyclicality and government policies relating to the industry.Credit Risk Information System (CRIS) Focused attention to structured financing deals . Borrower risk is evaluated by considering: • the financial position of the borrower by analyzing the quality of its financial statements. the department has been instrumental in reorienting the credit processes. ICICI Bank also uses RAM to manage its credit risk.Design appropriate credit processes. its growth outlook. Availability of information on a real time basis is an important requisite for sound risk management. Monitoring Monitor adherence to credit policies of RBI During the year. including delegation of powers and creation of suitable control points in the credit delivery process with the objective of improving customer response time and enhancing the effectiveness of the asset creation and monitoring activities. • the borrower's relative market position and operating efficiency. To aid its interaction with the strategic business units. ICICI Bank assesses a variety of risks relating to the borrower and the relevant industry. such as the importance of the industry to the economy. • the competitiveness of the industry. operating policies & procedures Portfolio monitoring . namely the Credit Risk Information System. In addition.
ICICI Bank also reviews the ratings of all borrowers in a particular industry upon the occurrence of any significant event impacting that industry. 2. Every proposal for a financing facility is prepared by the relevant business unit and reviewed by the appropriate industry specialists in the Global Credit Risk Management Group before being submitted for approval to the appropriate approval authority. The approval process for non-fund facilities is similar to that for fund-based facilities. All borrower accounts are reviewed at least once a year. The credit rating for every borrower is reviewed at least annually. Credit rating is a critical input for the credit approval process. At the end of the 12 month validity period (18 months in case of borrowers rated AA. It also reviews the completeness of documentation. Working capital loans are generally approved for a period of 12 months. 2007 are given below: .Project Finance Procedures 3. • Retail Loan Procedures • Small Enterprises Loan Procedures • Rural and Agricultural Loan Procedures • Credit Approval Authorities CREDIT RATINGS ICICI Bank’s credit ratings by various credit rating agencies at March 31.Working Capital Finance Procedures 5. creation of security and insurance policies for assets financed.Corporate Finance Procedures 4.Credit Monitoring Procedures for Corporate Loans -The Credit Middle Office Group monitors compliance with the terms and conditions for credit facilities prior to disbursement. ICICI Bank reviews the loan arrangement and the credit rating of the borrower and takes a decision on continuation of the arrangement and changes in the loan covenants as may be necessary. ICICI Bank determines the desired credit risk spread over its cost of funds by considering the borrower's credit rating and the default pattern corresponding to the credit rating.ratings from S1 to S8.and above).
CAPITAL ADEQUACY .
pending clarification required by RBI regarding certain terms of these bonds.0%. 6. If these bonds were considered as Tier II capital.60 billion) of foreign currency bonds raised for Upper Tier II capital have been excluded from the above capital adequacy ratio computation. other consumer loans and capital market exposure at a risk weightage of 125%.10 billion and unamortised amount of expenses on Early Retirement Option Scheme amounting to Rs. which are primarily based on the capital adequacy accord reached by the Basel Committee of Banking Supervision. have been reduced from Tier I capital while computing the capital adequacy ratio. Commercial real estate exposure and investments in venture capital funds have been considered at a risk weightage of 150%.27%. ICICI Bank is subject to the capital adequacy requirements of the RBI.81%. It is required to maintain a minimum ratio of total capital to risk adjusted assets of 9. the riskweighted assets at year-end fiscal include home loans to individuals at a risk weightage of 75%.42% and Tier II capital adequacy ratio of 4. the total capital adequacy ratio would be 12. Bank of International Settlements in 1988.69%. In accordance with the RBI guidelines.50 billion at year-end fiscal 2007. including Tier I capital adequacy ratio of 7. Deferred tax asset amounting to Rs. 32. 0. Its total capital adequacy ratio calculated in accordance with the RBI guidelines at yearend fiscal 2007 was 11. at least half of which must be Tier I capital. The risk-weighted assets at year-end fiscal 2006 and year end fiscal 2007 also include the impact of capital requirement for market risk on the held for trading and available for sale portfolio.(1) USD 750 million (Rs. .
(2) All amounts have been rounded off to the nearest Rs. (1) Includes loans. NON-PERFORMING ASSETS . lease receivables and excludes preference shares.Classification of gross assets (net of write-offs and unpaid interest on non-performing assets).0 million. 10. debentures.
CANARA BANK . (3) Customer assets include advances and credit substitutes like debentures and bonds. (4) All amounts have been rounded off to the nearest Rs.0 million. (2) Excludes preference shares.(1) Net of write-offs and interest suspense. 10.
In view of the centrality of customer convenience. emerging as the largest nationalized bank in India in terms of aggregate business volume for 2006-07. Canara Bank has several firsts to its credit. The Bank has undergone various phases in its growth path over hundred years of its existence. promoting rural development. These include: • • • • • • • Launching of Inter-City ATM Network Obtaining ISO Certification for a Branch Articulation of ‘Good Banking’ – Bank’s Citizen Charter Commissioning of Exclusive Mahila Banking Branch Launching of Exclusive Subsidiary for IT Consultancy First Bank in India to issue credit card for farmers First Bank in India to provide Agricultural Consultancy Services Over the years. attaining the status of a national level player in terms of geographical reach and clientele segments. serving national priorities. The growth of Canara Bank was phenomenal. the Bank provides a wide array of alternative delivery channels that include over 1900 ATMscovering 680 centres. the Bank has further expanded its domestic presence. 1157 branches providing Internet and Mobile Banking (IMB) services and 1833 branches offering 'Anywhere Banking' services. with 2641 branches spread across all geographical segments. in July 1906. a great visionary and philanthropist. the Bank has been scaling up its market position to emerge as a major 'Financial Conglomerate' with as many as nine subsidiaries/sponsored institutions/joint ventures in India and abroad. As at December 2007. Eighties was characterized by business diversification for the Bank. spearheading financial inclusion objective etc.Widely known for its customer centricity. the Bank completed a century of operation in the Indian banking industry. enhancing rural selfemployment through several training institutes. In June 2006. especially after nationalization in the year 1969. Canara Bank was founded by Shri Ammembal Subba Rao Pai. Karnataka. The eventful journey of the Bank was strewn with many memorable milestones. Canara Bank occupies a premier position in the comity of Indian banks. Canara Bank has made a distinctive mark in various corporate social responsibilities. which forms the basic plank of . Under advanced payment and settlement system. With an unbroken record of profits since its inception. Promoting an inclusive growth strategy. at a small port in Mangalore. namely. Today. 1693 branches of the Bank offer Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).
to the continued patronage of its valued customers. Risk is managed by using following tools: . committed staff and uncanny leadership ability demonstrated by its leaders at the helm of affairs. ANALYSIS & FINDINGS RISK MANAGEMENT IN CANARA BANK In Canara Bank. customer centricity. but also one with an obligation of helping in every possible manner to improve the economic conditions of the common people". enlightened leadership and a family like work culture. The growth story of Canara Bank in its first century was due. among others.national policy agenda today. is in fact deeply rooted in the Bank's founding principles. This justifiable belief is founded on strong fundamentals. stakeholders. We strongly believe that the next century is going to be equally rewarding and eventful not only in service of the nation but also in helping the Bank emerge as a "Global Bank with Best Practices". These insightful words of our founder continue to resonate even today in serving the society with a purpose. "A good bank is not only the financial heart of the community.
5733 crore for the same period of the previous year.07 CRAR 12.402 crore as compared to Rs. compared to a net profit level of Rs.213. the Bank aims to maintain a 12% CRAR as per Basel II norms.362 crore in the corresponding quarter a year ago. recording a growth of 8.66 as at September 2007. Capital to Risk Weighted Assets Ratio as at September 2007 worked out to 13. net profit for Q2 registered a 67% growth over Q1 in the current financial.18% growth (Y-OY) to reach Rs.95 for the corresponding period last year.6552 crore .89% vis-à-vis the regulatory minimum of 9%. registering a 76% growth. The Bank is fully geared up to make a smooth transition to the new capital adequacy framework under Basel II norms from March 2008. the Bank's total income registered a 36% growth to touch Rs. In the medium term.15.642 crore.48 as at September 2006 to Rs. Book value rose to Rs. CAPITAL ADEQUACY PARTICULARS 30. Credit Risk Assessment Software Model (RAM) as discussed earlier is used for managing Credit Risk faced by Canara Bank.7815 crore as against Rs. Net profit for the second quarter of the FY08 reached Rs.620 crore.27 % 13. Sequentially. Earnings Per Share (EPS) (not annualized) improved from Rs.• A scientific Risk Based Internal Audit system is used for complete and objective compliance with the Risk Based Supervision system.600 crore for the same period last year.09.97% as compared to 1.184.09. Return on Average Assets for the Q2 remained at 0.13.32 as at September 2007 from Rs.05% for the same quarter a year ago.89 % . • Canara Bank's Net profit for the first half year of FY08 recorded a 16. Total expenditure for the half year under review stood at Rs. after making a total provision of Rs.06 30.553 crore for the corresponding period of last year.41% as against Rs. recording a y-o-y growth of 11%.952 crore. Operating profit for Q2 stood at Rs.650 crore. The Bank has already commenced parallel run. With a strong 39% Y-o-Y growth in the interest income from core lending operations. Non-interest income for the half year amounted to Rs.
06 30. RATING OF CANARA BANK GIVEN BY MOODY’S .13 % .The CRAR of Canara Bank has increased from 12.27 % to 13. CB's focus on retail. small and medium-sized enterprise (SM E) and agricultural lending over the past few years has helped its loan diversification.99 % 1.89 % which is a good indicator of bank’s performance because it shows that banks’ capital in comparison to its risk-weighted assets have increased.13% as at September 2006 to 1. Bank's gross NPA ratio came down from 2.423 crore.66 % . Although there have been some signs of revival in the Indian industrial sector in the past few years. The rating also takes into account the increasingly competitive operating environment and the challenges the bank faces in modernizing its operations and processes.66% as at September 2007 while the net NPA ratio remained at 0. which in the past was dominated by corporate credits.99%.09.09.99 % Asset quality of the Bank exhibited further improvement as at September 2007. The . Backed by a cash recovery of Rs. we believe that the banks still have to contend with a high level of credit risk. reflecting the bank's important nationwide franchise and strong market position as the fourth-largest commercial bank in India. which translates into a Base line Credit Assessment (BCA) of Baa#.07 GROSS NPA RATIO (%) NET NPA RATIO 2.Moody’s assigns a bank financial strength rating (BFSR) of D+ to Canara Bank (CB). ASSET QUALITY PARTICULARS 30.
56% during nine-months ended December 2007). ICRA has also reaffirmed the A1+ rating to the certificate of deposit program of Canara Bank (Q.The rating indicates highest credit quality and the rated instruments carry the lowest credit risk.F)* indicating highest credit quality. Canara`s ratings factor in the implicit sovereign support enjoyed by the bank in its role as the largest Nationalised Bank in the country. of 10 .Chart. including revamping the operations of subsidiaries.62% during nine-months ended December 2007) and relatively low core fee income levels (0. the History of the Bank spread over three Centuries Nineteenth. N . The ratings also take into account the competitive operating cost structure. N. Twenty-First Century October. given the bank`s large branch network and the comfortable regulatory capitalisation levels and liquidity position. ICRA believes that the management`s efforts to reduce high cost deposits and rebalance the credit portfolio could start generating higher interest spreads over the medium term. While Canara`s core profitability has been declining as a result of the shrinking interest spreads (1. 2002 The Bank came out with Initial Public Offer (IPO).Quote. 1865 by a group of Europeans at Allahabad. Twentieth and Twenty-First. and the gains on its trading book could support profitability. Trade and Banking started taking shape in India.C. C . Q . F – Financials ALLAHABAD BANK PROFILE The Oldest Joint Stock Bank of the Country. the strong brand franchise in the corporate sector and improvement in asset quality as depicted by the declining credit costs. At that juncture Organized Industry. the bank`s efforts to improve fee income levels.BFSR also encompasses the bank's strong links with corporates. Thus. The bank has been maintaining a relatively superior operating cost structure but the inevitable investments required to upgrade its technology platform to cover more branches under CBS (Core Banking Solution) and Basel II requirements could adversely impact the operating cost levels. Instruments rated in this category carry the lowest credit risk in the short term.News. ICRA reaffirms LAAA rating to Canara Bank`s bond programs Leading credit agency. ICRA reaffirmed the LAAA rating to the outstanding lower tier II bond and infrastructure bond programs of Canara Bank (Canara). Allahabad Bank was founded on April 24. Meanwhile.
72. Risk processes. to meet the requirements of the guidelines. 2006 Oct. China. Risk structure etc. monitor and control various categories of risks. it works out to be 11. . While establishing the Risk Management Practice. The Bank opened its first overseas branch at Hong Kong. Follow on Public Offer (FPO) of 10 crores equity shares of face value Rs. 2006 February. Rolled out first Branch under CBS. opening Representative Office at Shenzen. manage. The Bank proposes to migrate to the final guidelines given by the RBI for embracing Basel II norms.1.10 each with a premium of Rs. 2007 March 2007 crores share of face value Rs.65% if we take March. • The Bank is updating / fine-tuning systems and procedures. Risk Mitigation and Risk audit. The Bank has also adopted an integrated approach at the committee level to put in place a robust Risk Management System. reducing Government shareholding to 71. align with the best practice in the Industry covering Organizational structure. 2005 June.000 crores mark. Bank's business crossed Rs.23%. the Bank has adopted a comprehensive approach. The Bank Transcended beyond the National Boundary. all in order to identify. RISK MANAGEMENT IN ALLAHABAD BANK ANALYSIS & FINDINGS The aim and objective of Risk Management Practice is to ensure stability and efficiency in the operation of the Bank.16%. 07 figures.10 each. The Bank initiated parallel run exercise in line with RBI guidelines.00. The CRAR as per existing norms (Basel I) stands at 12. technological capabilities.52% while under parallel run of Basel II norms.April. Risk Policies. reducing Government shareholding to 55.
dynamic. 2007 Total Deposit of the Bank went up to Rs. • • • • • .• • Improvement in Risk Management practices has been integrated with the betterment of asset quality through introduction of proper credit management practices. The Bank has developed various risk rating module for credit risk rating.89%) Working Funds crosses Rs.621 crores corresponding date previous year. Total Deposits grew by 26.59.06.13%.34% as at June-end 2007 from 2.3.50%) Market Share in aggregate deposits increased to 2. Centralised Credit Appraisal Cells have been created at Zonal Offices with proper networking arrangement for better processing of credit proposals and prompt decisions.773 crores as on 30. • Allahabad Bank also uses RAM for managing its Credit Risk. Year-on-Year basis.2007 from Rs.6.1. In regard to Operational Risk.2007. Year-on-Year basis.6. FINANCIAL POSITION The highlights of the performance for the quarter-ended June 2007 are summarised as under: • The Business of the Bank has crossed Rs.2007 as against Rs.(During April-June.70. The Bank has established a structured.82.21% (During April-June.2006 and Rs.819 crores as on 30. the Bank has framed policy and procedural guidelines for implementation as per the extant guidelines of Reserve Bank of India. The Bank has also devised risk rating module exclusively for SSI & SME sector.1.26% as at June-end 2006.03.49. proactive and integrated Credit Risk Management System to proper identification & quantification of the credit risk associated with the credit proposals.484 as on Juneend.544 crores as on 31. The Business of the Bank stood at Rs.71.62. 2007 : 5. Improved credit monitoring measures have already been put in place for insulating the Bank from future loan losses.000 crore mark to reach Rs.03. 2007 : 1.000 crore mark as at June-end 2007. the Business increased by 25.379 crores as on 30.
• • • • •
Gross Credit was Rs.40,560 crores as on 30.6.2007 as against Rs.32,848 crores as on 30.6.2006 and Rs.41914 crores as on 31.3.2007 Year-on-Year basis, the Gross Credit increased by 23.48%. Market share in advances also increased to 2.16% from 2.13% during this period. Gross Credit to Total Deposit ratio was 64.57% as at June-end 2007 as against 66.0% as at June-end, 2006. Operating Profit increased from Rs.207.43 crores during April-June'06 to Rs.288.87 crores during April-June'07, registering a growth of 39.26% during the period. Net Profit of the Bank was Rs.200.40 crores during April-June'07 as against Rs.128.25 crores in the corresponding period last year registering a growth of 56.26%.
ASSET QUALITY PARTICULARS 30.06.06 30.06.07 31.03.07
Gross NPA to Gross Advances 3.67 % Ratio (%) Net NPA to Net Advances Ratio .81 % (%) Capital CRAR Adequacy Ratio or 12.24 %
2.46 % .76 % 12.71 %
2.61 % 1.07 % 12.52 %
• • •
Gross NPA to Gross Advances further declined to 2.46% as at June-end 2007 from 3.67% as at June-end 2006 and 2.61% as at March-end 2007. Net NPA to Net Advances ratio also reduced to 0.76% as at June-end 2007 from 0.81% as at June-end 2006 and 1.07% as at March-end,2007. Capital Adequacy Ratio was 12.71% as at June-end 2007 which is above the stipulated norm of 9%, as against 12.24% as on 30.6.2006 and 12.52% as on 31.3.2007.
Net Interest Margin (NIM) remains steady at 2.97% as on 30.6.2007 compared to position as on 31.3.2007. As at June-end 2007, Earning per share (EPS) stood at Rs.17.94 as against Rs.11.48 as on 30.6.2006 and Rs.16.79 as on 31.3.2007. Book Value was Rs.104.23 increased from Rs.84.30 as on 30.6.2007 and Rs.100.22 as on 31.3.2007. Return on Assets improved from 0.99% as on 30.6.2006 to Rs.1.18% as on 30.6.2007. Business per employee rose from Rs.4.04 crores as on 30.6.2006 to Rs.5.02 crores as on 30.6.2007. As on 31.3.2007, the amount stood at Rs.4.56 crores. Business per branch improved from Rs.41.31 crores to Rs.49.06 crores during the period.
• • •
We know that on the basis of size the ranking of four banks considered for research work are: 1. ICICI Bank 2. Punjab National Bank 3. Canara Bank 4. Allahabad Bank All these banks identify, measure and then manage the risk faced by them.
Punjab National Bank (PNB) measures, monitors and manage credit risk for each borrower and also at the portfolio level. It uses various techniques for this purpose like: • Credit Policy • Rating of Borrower • Models for Credit Risk Rating • Credit Risk Rating for Performing Loans • PNB TRAC for online rating of borrowers • Preventive Monitering System (PMS) for monitering conduct of borrowel A/c on regular basis. • It updates the ratings of its borrowers annually. • Credit Risk Assessment Software Model (RAM) for assessing the credit risk faced by it. The Gross NPA as a % of Gross Advances has reduced from 3.98 % in Jun’06 to 3.81 % in Jun’07 i.e. by 4.2 %. Net NPA as a % of Net Advances Ratio has increased from .35 % in June ‘06 to .98 % in Jun’07 i.e. by 180 %. The CRAR of PNB has increased from 12.29 % in June ’06 to 12.41 % in June ’07 i.e. by .976 %
ICICI Bank measures, monitors and manage credit risk for each borrower and also at the portfolio level. It has made specific department for performing the various activities for credit risk management. These departments are: • Global Credit Risk Management Group • Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as well as in the portfolio context. It used credit risk rating system and RAM for managing and assessing its credit risk respectively. Gross NPA has increased from Rs. 22.73 billion in Mar’06 to Rs. 41.68 billion in Mar’07 i.e. by 83.36 %. Net NPA as a % of Net Advances has also increased from .71 in Mar’06 to % to .98 % in Mar’07 i.e. by 38.03 %. CRAR has decreased from 13.35 % in Mar’06 to 11.69 % in Mar’07 i.e. by 12.43 %.
89 %) as compared to Sep’06 (12.46 % in Jun’07 i.e 13 .67 % in Jun’06 to 3.99 % in Sep’07 also as compared to Sep’06. by 5. Allahabad Bank has shown a great improvement as both Gross NPA and Net NPA ratio are decreasing and CRAR is increasing. The ratio of Gross NPA as a % of Gross Advances has decreased from 3.20 %. Risk Policies.07 %.27 %). Its Net NPA as a % of Net Advances remained constant at .e. Its CRAR has increased from 12.81 % in Jun’06 to .24 % in Jun’06 to 12.e.72 %. by 13.e.13 % in Sep’06 to 1. Therefore. by 22. Allahabad Bank is at the second position because in its case both Net NPA as a % of Net Advances and Gross NPA as a % of Gross Advances have decreased by . Moreover its CRAR is highest among the all four banks and has increased by 13. CRAR for Allahabad Bank has increased from 12.Canara Bank also uses various techniques for managing its credit risk like: • Credit rating system • Risk based Internal Audit System • RAM Its ratio of Gross NPA as a % of Gross Advances has reduced from 2. Allahabad Bank uses a comprehensive approach.84 %.66 % in Sep’07 i. by 3.76 % in Jun’07 i. The Bank has also adopted an integrated approach at the committee level to put in place a robust Risk Management System.89 % as on 30 Sep’07 i. manage.17 %. finally we can conclude that if we consider the performance of individual banks in comparison to their own performance then Canara Bank is at the top position because its Gross NPA a % of Gross Advances has reduced by 22. Risk processes. aligned with the best practice in the Industry covering Organizational structure.27 % as on Sep’06 to 13. In comparison to itself. Risk Mitigation and Risk audit. monitor and control various categories of risks. all in order to identify.e. The ratio of Net NPA as a % of Net Advances has also reduced from . by 6.07 % and Net NPA as a % of Net Advances has remained constant at 99 % which shows that it has been able to manage its credit risk effectively due to which its NPA has decreased.20 % in Sep’07 (i.71 % in Jun’07 i.e. Various credit monitoring measures are used by the bank and RAM is also used by the bank.
68 billion in Mar’07.com www.e.pnbindia.72 % and also the CRAR has increased by 3.allahabadbank.e. then is Punjab National Bank and at last is the ICICI Bank which has not managed is credit risk effectively due to which its NPA’s are increasing even though it has made so many departments for managing credit risk and is also using so many software’s for it. 22. then is Allahabad Bank. ICICI Bank is at the last position in case of managing its credit risk because its Gross NPA has increased from Rs.41 % as on Jun’07. . Thus. these banks need to improve upon their credit risk management system as it is very important for their growth prospectus.com Online Newspaper: Hindu Business Line .84 % and is 12. Thus.canarabank.com www.2 % but Net NPA as a % of Net advances has increased drastically by 180 %.com www.98 %) as compared to Mar’06 (.71 % in June’07.17 % and 5. Its Net NPA as % of Net Advances has increased by 38. to 12.71 %). However. it CRAR has increased by .google. BIBLIOGRAPHY WEBSITES: • • • • • • www.43 % till Mar’07 (i. Its CRAR has also decreased by 12.73 billion in Mar’06 to Rs. we can conclude finally that Canara Bank manages its Credit Risk most effectively.03 % till Mar’07 as compared to Mar’06. At the third position is the Punjab National Bank as its Gross NPA as a % of Gross advances has decreased by 4. This shows that there is certainly some flaw in its credit risk management system and also in credit management system of PNB.icicibank.com www. 41.6.976 % i.
BOOKS: • • Financial Institutions and Markets. By: M.Y. By: L. Bhole Indian Financial System. Khan .M.
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